Inflation Hasn’t Yet Reached the Wild Levels of the 70s


Today’s market action offers us a simple lesson: markets better than governments. Take oil. As Gabriel and Al mentioned in Money Morning earlier this week, the correction is on. Oil was down another two dollars in U.S. trading around US$122. And it wasn’t even the thundering of George Soros in front of Congress that scared speculators out of their positions, either.

High prices, as the saying goes, are the cure for high prices. “Cure” may not be the best word, though, especially if you’re an airline company or a car maker. Here in the States, United Airlines announced it would cut its domestic service Ted (the equivalent of Jetstar), cut 1,100 jobs, and retire about 70 planes, including the lumbering, old, creaky 747s that fly the Sydney to LA and Sydney to San Francisco route.

Why the drastic measures? Jet fuel prices are up 89% in the last year. High prices. The auto industry is finally reacting to high prices as well. General Motors announced it would close four truck and SUV plants in the U.S. and shed 10,000 jobs. GM’s capacity to build gas-guzzling trucks will decline by 35%.

It’s been a long time coming. And while GM makes fewer bigger cars, the company plans to make a new smaller, more fuel-efficient car. It also plans to get into the plug in hybrid market with the Chevy Volt.

Jets and cars and oil prices. Demand is finally destroyed by high prices. Of course the demand destruction in the transportation and travel market means a contraction of an economic activity. It also means, as GM’s CEO Rick Wagoner suggested, a permanent shift to a world where cheap energy is no longer the assumption. Maybe we’re moving toward a different living arrangement after all. Hmmn.

Much too late in the game, Fed chairmen Ben Bernanke is talking up the dollar, as if kind words were any replacement for a real yield. Bernanke is trying to talk people out of being worried about the very inflation his monetary policy has caused worldwide. He told listeners to a commencement speech at Harvard that heightened inflation expectations by the public are a “significant concern.”

But don’t worry, he continued. This ain’t nothing like the 70s. It’s all good. Nothing to see here. Move along. Go away. Shut up. Goodbye.

“We see little indication today of the beginnings of a 1970s-style wage- price spiral,” is what Bernanke actually said. “The overall inflation rate has averaged about 3.5 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s.”

Well it all depends on how you measure inflation, doesn’t it? The Fed probably under reports actual inflation. But it’s also probably true that inflation hasn’t yet reached the wild levels of the 70s. For that to happen, expectations have to begin driving consumer behaviour (trading cash for tangible goods while the cash retains purchasing power) and monetary policy must become even looser to respond to tight credit markets or over-indebted consumers.

Do you really think the Fed will be raising rates this year? Not likely, with credit markets still tied up in knots and house prices in the U.S. still falling. This is one reason why we think the Aussie dollar is still a good bit to hit parity this year with the greenback.

Speaking of Australian interest rates, just when you thought it was safe to begin thinking of lower rates, more mixed signals for the RBA. The Australian Bureau of Statistics reported yesterday that Aussie GDP grew at 0.6% in the first quarter. That comes out to an annual rate of 3.6%.

That growth rate is 0.6% higher than what economists surveyed by Bloomberg expected, although it’s lower than last year’s rate of 3.9%. This is exactly the kind of economic growth that’s led the RBA to the conclusion that inflation will grow at 4.25% until some time in 2010.

Not so, says the OECD! The OECD assures us that inflation will slow to 3% by the end of next year, a full year earlier than Australia’s own central bank expects. Why? Because, “economic activity is likely to slow to below 3% in 2008 and 2009 because of tighter financial conditions and the worsening external environment. This should ease pressures on the labour market and bring inflation down to under 3% by the end of 2009.”

Well there you go. Despite all evidence to the contrary, the OECD says it will be so.

We know the DR has been a little thin on analysis of the Aussie market and the economy this week. We promise to resume our full coverage upon our return next week. Until tomorrow…

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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1 Comment on "Inflation Hasn’t Yet Reached the Wild Levels of the 70s"

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Coffee Addict
Will inflation reach 70’s levels? The creation of paper liquidity without any corresponding increase in growth has me believing that in the US at least, 1970’s levels of inflation could well be exceeded. Low consumer demand will as Dan suggests be a moderating factor. Another moderating factor is the measurable decline in both the mass and velocity of corporate money circulating the globe. Which force will be the greater? My guess is that overall consumption will not fall by a margin (or in a timeframe) necessary to significantly offset the current money printing exercise. As stated before, inflation is the… Read more »
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